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IMF admits: we failed to realise the damage austerity would do to Greece

Athens officials react to report with glee, saying it confirms that the price extracted for country’s bailout package was too high IMF chief Christine Lagarde. Greek media recently quoted IMF her describing 2011 as a ‘lost year’, partly because of miscalculations by the EU and IMF. Photograph: Stephane Mahe/Reuters
Larry Elliott, Phillip Inman and Helena Smith in Athens originally published at The Guardian Wednesday 5 June 2013
The International Monetary Fund admitted it had failed to realise the damage austerity would do to Greece as the Washington-based organisation catalogued mistakes made during the bailout of the stricken eurozone country.

In an assessment of the rescue conducted jointly with the European Central Bank (ECB) and the European commission, the IMF said it had been forced to override its normal rules for providing financial assistance in order to put money into Greece.

Fund officials had severe doubts about whether Greece’s debt would be sustainable even after the first bailout was provided in May 2010 and only agreed to the plan because of fears of contagion.

While it succeeded in keeping Greece in the eurozone, the report admitted the bailout included notable failures.

“Market confidence was not restored, the banking system lost 30% of its deposits and the economy encountered a much deeper than expected recession with exceptionally high unemployment.”

In Athens, officials reacted with barely disguised glee to the report, saying it confirmed that the price exacted for the €110bn (£93bn) emergency package was too high for a country beset by massive debts, tax evasion and a large black economy.”

Under the weight of such measures – applied across the board and hitting the poorest hardest – the economy, they said, was always bound to dive into an economic death spiral.

“For too long they [troika officials] refused to accept that the programme was simply off-target by hiding behind our failure to implement structural reforms,” said one insider. “Now that reforms are being applied they’ve had to accept the bitter truth.”

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The IMF said: “The Fund approved an exceptionally large loan to Greece under an stand-by agreement in May 2010 despite having considerable misgivings about Greece’s debt sustainability. The decision required the Fund to depart from its established rules on exceptional access. However, Greece came late to the Fund and the time available to negotiate the programme was short.”

But having agreed that there were exceptional circumstances that warranted the biggest bailout in the Fund’s history, officials were taken aback by the much bigger than expected slump in the Greek economy. The country is now in its fifth year of recession and the economy has contracted by 17%. The IMF thought it would contract by just 5.5%.

In the evaluation of the package provided in 2010, the IMF said: “Given the danger of contagion, the report judges the programme to have been a necessity, even though the Fund had misgivings about debt sustainability.

“There was, however, a tension between the need to support Greece and the concern that debt was not sustainable with high probability (a condition for exceptional access).

“In response, the exceptional access criterion was amended to lower the bar for debt sustainability in systemic cases. The baseline still showed debt to be sustainable, as is required for all Fund programmes.”

In the event, the report added, the Fund was open to criticism for making economic projections that were too optimistic.”

While the report says a deep recession was unavoidable, it is critical of senior officials in Brussels and European capitals who said Greece would fare better outside the euro. Concerns that Greece could be ejected from the euro and return to the drachma intensified an already febrile situation.

“Confidence was also badly affected by domestic social and political turmoil and talk of a Greek exit from the euro by European policymakers,” it said.

Brussels also struggled to co-ordinate its policies with the ECB in Frankfurt, according to the report.

“The Fund made decisions in a structured fashion, while decision-making in the eurozone spanned heads of state and multiple agencies and was more fragmented.”

The Greek media recently quoted IMF managing director Christine Lagarde describing 2011 as a “lost year” partly because of miscalculations by the EU and IMF.

The authoritative Kathimerini newspaper said the report identified a number of “mistakes” including the failure of creditors to agree to a restructuring of Greece’s debt burden earlier – a failure that had had a disastrous effect on its macroeconomic assumptions.

“From what we understand the IMF singles out the EU for criticism in its handling of the problem more than anything else,” said one well-placed official at the Greek finance ministry.

He added: “But acknowledgement of these mistakes will help us. It has already helped cut some slack and it will help us get what we really need which is a haircut on our debt next year.”

One response to “IMF admits: we failed to realise the damage austerity would do to Greece”

Greece’s 4th July 2015, Declaration of Independence from TROIKA Control

As my graduate philosophy professor once said, “No one promised that enlightenment about the REAL WORLD would make one happy, but it will surely make one more of what one already is. The question remains, what is one to do with such enlightenment?”

In the Greek case, the use of the debt weapon as economic war and control Greece’s economy shows the rising of Greece’s democracy-in-action as one answer for a declaration of independence.

So, please dear reader, read this passage as a reminder, read it very, very closely:

The Declaration of Independence of the Thirteen Colonies In CONGRESS, July 4, 1776

The unanimous Declaration of the thirteen united States of America,

When in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature’s God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. –That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed,